9.8.1 The Traditional IRA
Basically, the traditional IRA allows contributions to grow tax deferred. The funds extracted from the employees' compensation are not taxable as income (called pretax contributions). Participants can contribute up to $5,000 per year. Contributions exceeding these limits are subject to a 6% excise tax. (2012, same as 2011)
Those participants who are 50+ years of age may contribute an additional $1,000 to compensate for prior missed contributions. The same applies to the Roth IRA.
Adjustments are scheduled to be made thereafter to compensate for inflation. Nonworking spouses have the same contribution limits and restrictions as all other eligible individuals.
Anyone under the age of 70 1/2 with earned income may open a traditional IRA.
Withdrawals must start no later than April 1 following the year in which the participant reaches the age of 70 1/2, and the law specifies a minimum amount that must be withdrawn every year. No cash withdrawals prior to the age of 59 1/2 are permitted without having to pay a 10% excise tax, with the following exceptions:
- if the owner dies or becomes disabled;
- if distribution is in equal payments over the owner's lifetime;
- if higher education expenses for a dependent are necessary;
- to purchase a first home with up to $10,000 down payment;
- if out-of-pocket medical expenses are in excess of 7.5% of adjusted gross;
- to pay health insurance premiums while unemployed; or
- to correct or reduce an excess contribution.
Deduction of IRA contributions depends on two factors: (1) Whether or not the participant is covered by an employer-sponsored retirement plan and (2) the participant's income.
Flexible premium fixed deferred annuities, bank certificates of deposit, insured credit union accounts, mutual fund shares, face amount certificates, real estate investment trust units, and eligible gold and silver coins are all excellent funding vehicles.
A flexible premium fixed deferred annuity based on interest rate is an ideal funding vehicle.
Income levels at which IRA deductions can be taken are shown in Illustration 13.3 in the Florida study manual.
